Following a sharp decrease in the price of iron ore, junior producers are now receiving tax concessions from the West Australian government to keep them afloat. Judged on a case by case basis, the government believes offering a 50% rebate on iron ore royalties is a fair solution to the short term dip in the commodity’s price.

Nev Power, CEO of Fortescue Metals Group (ASX: FMG), warned that this could lead to the adoption of a handout mentality. “That (assistance) can be never-ending, and we’ve seen that in other industries in Australia that once you start those levels of support there’s no end to it.”

The royalty relief will be offered to iron ore producers who can show that the current tax rate is causing significant financial hardship. It will be offered on the condition that prices stay below $AU90 per tonne over the next 12 months only.

Those opposed to the new policy say it only has merits in the short term and that many analysts predict that prices could stay at these levels for years to come. This relief will also come as a double hit to the budgets bottom line. It has already been weakened by falling royalty revenue and is now expected to prop up the members of the same industry.

Atlas Iron (ASX: AGO), one such company set to receive the assistance, said it had begun to prepare for a long term price correction at these new levels by reducing capital spending by $AU25 million. It has also just made its first shipments to South Korea and India in an effort to diversify its client base and avoid being wholly dependent on a cooling Chinese economy.

Atlas’ reaction to the falling iron ore price is what is to be expected in a free market; it is reducing investment and expanding its client base in response to a change in price. But by further singling them out for royalty relief, the market could be prevented from finding supply and demand equilibrium. By intervening, the government undermines the efficiency and stability of a free market system, adding further uncertainty to a volatile commodity.

“We would be concerned if other countries were subsidizing their iron ore production and there wasn’t a level playing field”, said Mr. Power. “The long-term view is we think it’s important that producers become efficient and cost-effective enough to be able to survive and prosper in the market.”

Rio Tinto announced it aims to increase iron ore output a further 18% in 2015. There will also be a new mid-tier producer entering the swelling market, Hancock Prospecting. With fresh supply to be seen in the coming year, iron ore prices could be held at levels below $80 for some time yet and no amount of tax concessions will change this. To remain competitive in this market it should be expected that all companies consider internal restructuring rather than waiting on tax-payer generosity to delay the inevitable.